If you own property, you have options. There are a variety of ways to generate steady cash flow from your real estate holdings. Renting is one of the most obvious ways to earn money from your property, but some owners prefer listing their short-term rentals on Airbnb. However, local regulations against home-sharing are becoming more common, so Airbnb hosting has its own set of unique challenges. If you compare Airbnb vs renting, there’s a variety of factors your need to consider.
Airbnb vs Renting: Main Differences
Airbnb vs renting, which option is better? Both have distinct advantages and disadvantages. It is important to carefully consider your options and choose the method that best fits your lifestyle, goals, and financial needs.
Airbnb is a third party platform that helps hosts list their properties for short term use. Hosts can list a variety of property types, including houses, rooms, apartments, villas, and even yachts. Airbnb promotes your listing and handles payments, so all you have to do is list your property.
A traditional rental listing is a part of a long term investment strategy and involves listing your property for a rental term of 6 months or longer. As a landlord, you are responsible for promoting your rental and collecting rent. Some landlords choose to hire a third-party property management company to handle all aspects of the rental process.
Airbnb vs Renting: Pros and Cons
If you are considering listing your property, it is a good idea to consider the pros and cons of each option. Are you looking for a more consistent income? Are you hoping to maintain some usage of the property? These are just a few things to consider.
Airbnb offers a lot of flexibility for owners. Owners have the option of renting out a spare room or even the whole house. And because Airbnb offers short term rentals, hosts have the option of when they want to make their property available. Airbnb also allows hosts the ability to customize their listing with a detailed description and pictures. Here are some other benefits and disadvantages of listing your property with Airbnb.
If you are looking to rent out your property part-time, Airbnb is a good option. Airbnb is perfect for homeowners who own a second home as a vacation home. This allows owners the ability to also utilize their property when they like.
Owners also have the option to set their own rates on Airbnb. This allows owners to set rates dynamically to meet demand in the area and also meet their financial goals. With a traditional rental, the price is set according to the lease agreement, and cannot be changed until the lease is up.
If hospitality is your jam, Airbnb offers hosts the ability to facilitate personal experiences for guests. Airbnb experiences offer guests the ability to experience local attractions under the guidance of the host. For example, some experience hosts offer things like cooking classes, gardening classes, bike tours, and more.
Protection for Hosts
Airbnb offers insurance protection for hosts of up to $1 million in damages. The policy protects you if a guest damages the property.
Free To List
There is no initial cost to list your rental on Airbnb. However, Airbnb does charge a 3% processing fee.
While Airbnb offers hosts a lot of flexibility with their listing, there are some drawbacks.
While Airbnb does offer insurance for damages of up to $1 million, some hosts may not want to deal with the stress of potential damages. While most guests are great, sometimes a guest is a bad apple, in which case your home could be susceptible to damages.
Income May Not Be Consistent
While Airbnb can offer tremendous income earning potential, the income may not always be consistent. Income potential will depend on your location and the events going on in your area. In some areas, income potential may be seasonal.
Home Share Regulations
As Airbnb has gained in popularity, some cities have taken steps to prevent short term rentals in their areas for various reasons. It is important to research the local laws in your area before proceeding with listing your property on Airbnb. As the host, it is your responsibility to familiarize yourself with the local rules and regulations regarding short term rentals.
With Airbnb, you will have to clean your listing after each use. This will either require you to hire someone to clean your listing for you or do it yourself. This will either result in more out of pocket costs for you, or more of your time. Some hosts simply may not have the time to devote to managing their short term listing.
Traditional rental properties can offer more security for hosts who are looking for a more long term investment strategy. Here are some benefits of a traditional rental property.
Less Turn Over
Less turn over can mean less work for hosts. Since guests aren’t coming and going all of the time, you won’t have to spend as much time cleaning and maintaining your listing.
Long Term Income
Long-term rental income is usually more consistent. You can set the terms of the lease to fit your financial needs. Renters under lease also tend to stay put for longer so the revenues are more stable. Sometimes it’s hard to fill Airbnb rentals in the off-season, but leased rentals provide guaranteed year-round income.
The income earned from Airbnb is treated the same as the rest of your income, and therefore subject to taxes. However, while traditional rental income is still subject to tax, there are a lot of concessions available to owners. The cost of getting the property ready to rent and maintaining it can be deducted from the rent you bring in.
While traditional rental income can be more consistent, it can also be less flexible. Here are some of the disadvantages of having a traditional rental listing.
You Are Locked Into The Lease Agreement
The lease agreement is a binding document, which states the terms of the lease including the rent amount and term. You can’t change for the least term, and you’re stuck with your tenants until the lease expires. If you hate your tenants, you’re still obligated to honor the lease until it’s up.
If things go south with your long term tenants, you may have to deal with the eviction process. This can be time-consuming, tedious, stressful, and costly.
Some owners elect to hire a property management company to manage all aspects of their rental property. This is an additional cost to the homeowner.
Airbnb vs Rental: Head to Head Comparison
Determining which route is best for you requires careful consideration and will depend on your wants, needs, and goals.
For the following list of categories, choose whether Airbnb or Rental is the better option, and explain why.
One of the biggest things to consider is the tax implications involved with Airbnb income. Airbnb income is taxed differently than traditional rental income. Income earned from Airbnb is subject to income tax, whereas traditional rental income is treated a little differently.
Traditional rental income can be leveraged with more deductions to reduce the amount that can be taxed. This includes maintenance costs, depreciation, mortgage payments, legal fees, professional fees, and more. In terms of tax benefits, traditional rental income can be subject to less tax.
Using a vacation home as an income vehicle can help pay for your vacation home, and also help generate an income. However, it is important to consider the 14-day rule which states that the income is not subject to tax if you rent your home out fewer than 14 days a year and occupy your home at least 10% of the time it is made available to rent. In which case, if you are only planning on listing your property part-time, Airbnb may be the better solution.
Owner Occupied Dwellings
If you are planning on renting out your spare room and not your whole house, Airbnb is the best solution. This gives you more control over how often you rent your space and allows you to control the rate better.
Airbnb rules and regulations vary from state to state and city to city. Some cities have placed really strict restrictions on short term rental listings, making traditional rental listings a better choice for many. As the owner, it is your responsibility to do your due diligence and research the laws and implications in your area before listing your property on Airbnb.
Airbnb offers more flexibility, which can provide more convenience. If you plan on using the property yourself, you may want to maintain this flexibility. At the same time, you will have more turn over, which will require more frequent maintenance, which some may view as inconvenient. It will depend on your lifestyle and how much time and effort you want to put into your listing.
Overall, because of the flexibility and income potential, Airbnb could be more lucrative for hosts. Many hosts find that even with short stays they can generate a higher income from their short term listing. This is due to the flexibility with the rate and higher turnover.
Tax Planning for Rental Businesses
You also need to consider taxes in the Airbnb vs renting argument. Short-term rental income can affect your taxes in a variety of ways. The experts at Shared Economy Tax can tell you which strategy will provide the best tax benefits for your business. Our tax planning experts can help you save thousands in unnecessary tax expenses. Get started today with a one-on-one strategy session with one of our tax pros. You can also sign up for our tax tips newsletter using the form below.